Suppose that the Government runs a pension fund to which all workers must contribute. The employee contribution rate is 6.2 percent on the first $84,900 of income. All income in excess of $84,900 is not taxed for pension purposes. What was the effective pension tax rate for a person earning $20,000 a year?
The tax rate is given to you; it is 6.2 percent.
To calculate the effective pension tax rate for a person earning $20,000 a year, we need to determine the amount of income that will be taxed for the pension purposes.
Since the tax rate is 6.2 percent on the first $84,900 of income, we can calculate the tax using the following formula:
Pension tax = (Income * Tax rate)
In this case, the income is $20,000 and the tax rate is 6.2 percent. Plugging these values into the formula, we get:
Pension tax = ($20,000 * 0.062)
Pension tax = $1,240
Therefore, the effective pension tax rate for a person earning $20,000 a year would be 1,240/20,000 = 0.062, or 6.2 percent.
So, the effective pension tax rate for a person earning $20,000 a year is 6.2 percent.